CASH FLOW ANALYSIS

Cash Flow Analysis



Cash Flow Analysis

Introduction

Statement of cash flows is one of the primary financial statements, which summarizes information on the collection and disposal of funds of the company. Statement of cash flows, in addition, contains information that is useful in assessing the financial flexibility of the firm. Financial flexibility of a firm's ability to generate large sums of money in order to promptly respond to unexpected needs and opportunities. Information about cash flows for prior periods, especially the cash flow from operating activities, helps to assess financial flexibility. Assess the ability of firms to survive, for example, an unexpected fall in demand may include an analysis of cash flow from operating activities for past periods. The greater cash flows, the higher will be the firm's ability to withstand adverse changes in economic conditions.

Components of Cash Flow Statements

The main purpose of cash flow analysis is to identify the causes of the deficit or surplus of funds, identify the sources of their income and expenditure trends for the control of the current liquidity and solvency of the enterprise. These parameters are directly dependent on the actual cash flow as a stream of cash receipts and payments as disclosed in the accounts of the balance sheet. Therefore, analysis of cash flow complements the methodology for assessing the solvency and liquidity and makes it possible to realistically assess the financial and economic condition of the enterprise. For these purposes, you can use both direct and indirect method.

The statement of cash flows is included in the basic financial statements to be prepared by companies to comply with institutional rules and regulations of each country. It provides information important to business managers and is a response to the need to determine the output of resources at any given time, as well as an analysis projective to support decision making in the financial, operational, administrative and commercial (Groppelli and Ehsan, 2006)

All companies, regardless of the activity they are engaged, they need reliable financial information, one of which is provided by the statement of cash flows, which shows the cash flows of the period, that is, the inputs and outputs cash provided by operating activities, investing and financing, which will serve the management of companies for decision making. Besides it, the cash flow consists of three main sections that are;

- In operating activities, cash flows arising as a rule, the main income-generating activities of the company.

- In investing activities, the cost of resources intended to generate future income.

- In financing activities, cash flows associated with the formation of a company's capital

Cash flow from operating activities may be made in one of two methods that is the direct method and the in- direct method. The direct method, which revealed the main types of gross cash receipts and payments, that is, in fact it's profit and loss report, compiled on a cash basis. In the indirect method whereby net profit or loss adjusted for non-monetary nature of the results of operations and changes in ...